ESG-Related Regulations: Update on the US SEC Fund Name Rule

Note to US Citizens: Please note that this article is not intended to constitute legal advice to any citizen or resident of the United States of America.

This past spring, we discussed the SEC’s proposed rules regarding ESG-Related Regulations, including amendments to the SEC’s Fund Name Rule. To recap, the proposal broadened the applicability of the 80% investment policy mandate. This mandate stipulates that a fund must invest a minimum of 80% of its assets in accordance with terms mentioned in the fund’s name. The proposal extends this requirement to include any terms in a fund’s name that pertain to ESG (Environmental, Social, and Governance) factors.

On 20 September 2023, the SEC announced in a Press Release that they have adopted the amendments to the Fund Name Rule (section 35d-1 of the Investment Company Act of 1940). The existing Fund Name Rule aims to prevent fund names from misleading investors about the fund’s investment policies and any potential risks the policies may expose investors to. If a fund name suggests a focus in a particular type of investment, it is required to adopt a policy aligning at least 80% of the fund’s assets in those investments. The final rule release reveals that the SEC contemplated a disclosure-based framework instead of the 80% investment policy, however, ultimately concluded that the 80% investment policy method was best for addressing concerns of misleading investors. The SEC attributes this decision, in part, to the fact that a fund’s name is the first information investors receive regarding the fund and has been found to have an impact on investors’ decisions to invest in a fund.

How to comply?

The amendments do not state exactly which additional wording or phrases will bring a fund’s name under the scope of the amendments, however, the primary types of names that the amendment is anticipated to cover, include fund names such as “growth” or “value” or terms that have a thematic or ESG focus according to the SEC factsheet released with the final rule. Terms in fund names will need to be defined in fund prospectuses along with an explanation of criteria used for selecting investments associated with those terms. Terms in fund names must also be consistent with plain English meanings.

The amendments require that funds follow the 80% investment policy during normal circumstances. Where a fund identifies that their portfolio is inconsistent with the 80% investment policy, the fund is obligated to return to compliance as soon as is reasonably practicable, which shall be no later than 90 days after identifying that the portfolio is not in compliance. Funds will be required to assess their portfolio assets’ inclusion in the fund’s 80% basket at least quarterly.

The amendments also include new recordkeeping requirements. Funds that are newly required to adopt an 80% investment policy will need to maintain a written record documenting its compliance with the rule, including the fund’s record of which assets are invested in the fund’s 80% basket. This recordkeeping requirement will be filed on the fund’s Form N-PORT filing. According to the final rule, a fund will also be required to keep records of any notice the fund sends to its shareholders pursuant to the rule. Funds that are not required to adopt an 80% investment policy do not have any obligations under these additional recordkeeping requirements.

Next steps

Certain funds, such as closed-end funds and business development companies (BDCs), will potentially need shareholder approval before changing their 80% investment policy pursuant to the rule amendments.

The Fund Name Rule amendments will become effective sixty (60) days after publication in the US Federal Register.

Funds will have 24 or 30 months to comply with the amendment from its effective date, depending on the size of the fund:

• Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments;
• Fund groups with net assets of less than $1 billion will have 30 months to comply.

Please note that one point remains open for discussion in relation to the ESG “integration funds” as the SEC is not adopting the proposed approach to integration fund names. In this regard, the SEC stated that it is still reviewing public comments and that it remains under consideration.

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